KPO Trends, September 2007

This article talks about evolving trends in the Knowledge Process Outsourcing (KPO) industry - which includes business research, financial analysis, market research, statistical analysis and other research/analysis processes delivered from India to global consulting firms, investment banks (not many left these days!), market research firms, banks/financial institutions, and other large corporations. I had a unique opportunity to join the nascent KPO practice at one of India's largest BPO firms in 2003, and helped grow the KPO business to over 1,500 analysts when I left in 2008. It has been a great journey and an enriching experience, and helped me appreciate all the dimensions of KPO - its possibilities, challenges, headaches, excitement, and potential.

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KPO Trends for 2010

U. Partha Sarathy, September 2007


The Knowledge Process Outsourcing (KPO) industry has been around for less than 10 years, but has already achieved significant milestones in terms of revenues, headcount and client impact. I believe the next 5-10 years of the KPO industry’s growth will be even more dramatic, as firms build scale, develop new capabilities, and follow new business models. Below are some trends that I see becoming more important in the coming years in the KPO industry.

Trend 1: Demand set to rise exponentially
The increasing acceptance of the KPO model suggests that the coming years will see exponential rise in demand for KPO, and substantial mismatch between supply and demand. Two factors are driving demand. First, while the KPO industry has historically targeted the professional services segment (investment banks, market research firms, consulting firms, etc.), I see increasing demand from the “corporate” segment, i.e. large companies in a wide variety of industries. Professional services firms were natural candidates for KPO since research and analysis is their core activity, and these industries had experience in working globally. The corporate segment is a less obvious target for KPO, but demand from these new verticals could be many multiples of the demand from professional services. Second, the KPO model is still nascent and demand is likely to grow substantially as the KPO model gets established. KPO is perhaps the first instance where offshore outsourcing is creating a new industry that did not exist in the developed economies; unlike IT outsourcing and BPO where offshore vendors are largely replicating what onsite vendors have always provided. The KPO industry is really the creation of India-based providers, so as the model gets more established, I expect demand to grow 50+% per year for the foreseeable future. The demand-supply mismatch could lead to rising billing rates, increased employee attrition, rising salaries, pressure on service delivery, and rising profit margins.

Trend 2: Customers interested in buying a suite of intelligence services
While the early KPO deals focused on specific research/analysis services, I see customers increasingly moving to a suite of intelligence services. For example a client may need an offshore solution that includes specific horizontal services (industry research, MIS/reporting, statistical modeling, competition research) at different levels of complexity and sophistication (basic research, detailed analysis, modeling, etc.). This model helps address a complex business problem by dis-aggregating it into different components that can be solved using specialized techniques/skills. Two factors seem to be driving this trend. On the demand side, some clients are building market intelligence cells that integrate multiple components – such as market research surveys, industry research, competition research, marketing MIS/performance metrics, and statistical modeling – and they need the KPO provider to support them with a suite of intelligence services. Offshoring makes it easier for the client to achieve centralization of various research/analysis functions at the KPO firm’s offshore location, even though these functions may be fragmented across their onsite divisions/units. On the supply side, KPO providers have demonstrated synergy in combining multiple components of intelligence together. For example Marketics Technologies, the analytics division of WNS, has developed the “M-Scan” methodology for building scalable “assembly line” analytics teams using centers of excellence for various analytics disciplines. Providing a suite of services also allows the KPO firm to provide a career path for their analysts to move up the value chain

Trend 3: Need for verticalization
The KPO industry today specializes in a few key “horizontal” offerings – business research, financial research, analytics and support services – targeted mainly at the professional services segment. I believe that over the next few years KPO firms will develop verticalized offerings tailored for specific industries – such as pharmaceuticals (e.g. competition analysis, sales force optimization, product pipeline analysis), insurance (e.g. direct marketing analytics, actuarial analysis), mortgage banking (pricing of mortgage-backed securities, pre-payment risk modeling), and so on. Instead of telling clients “we offer these 4 horizontal services and we would like you to buy these”, the pitch needs to become “we offer these specific services that your industry requires”. KPO firms will also need to develop deep industry-specific skills in pre-sales, diagnostics, solution design, transition and service delivery.

Trend 4: Rise of the “factory model”
One of the big trends in the KPO industry is the move from an effectiveness focus (“can you do this work from India?”) to an efficiency focus (“can you do it with high quality, low costs, and continuous improvement?”). To cater to this demand, KPO firms are moving away from the “offshore body shopping” model in some early KPO projects (small groups of analysts working on relatively unstructured projects) to what is called the “factory model”, which involves large teams of analysts with similar skills, following a structured process, and being managed in a BPO-like environment. For example, a large financial research process for an investment bank would utilize analysts with commerce/accounting degrees who have received necessary training, rather than depend exclusively on hiring CAs and MBAs. This allows the KPO firm to build and manage large teams to meet the requirements of large clients, and keep costs under control. Key elements of the factory model are:
“De-skills” the research process by breaking up a business problem into structured, less complex components that can be addressed through specialized techniques/skills.
Enables the KPO firm to hire from a larger and less expensive pool of talent, including from Tier-II cities.
Reduced impact of attrition, since analysts are easier to hire, and inter-changeable.
KPO providers are able to use the factory model to build new capabilities to meet more client requirements, and at the same time they will also have to turn down fragmented and sub-scale KPO work that does not fit in with the factory model.

Trend 5: Consolidation in the industry
I expect that much of the incremental growth in the KPO industry will be captured by large “hybrid” (blended BPO and KPO) offshoring providers. Other firms – niche KPO firms, pure-play KPO firms and KPO units of captive BPO firms – will grow, but may be unable to maintain their market share, due to their inability to build “vertical” competencies and deliver using the factory model. I expect the large “hybrid” (BPO/KPO) firms to undertake three kinds of mergers and acquisitions:
Horizontal India-based KPO firms (offering specific services such as analytics, supply chain services, market research), in order to build new capabilities, reduce SG&A costs, and expand to tier-II cities to source talent
Vertical US-based firms to build industry-specific offerings and acquire clients, e.g. boutique research/consulting firm focused on a particular industry sector
KPO units of captive BPO firms, which may face pressure due to rapidly rising employee costs, high attrition and stagnating career paths for employees

Trend 6: Knowledge management to drive service delivery
I believe that knowledge management will increasingly become a critical success factor for KPO industry in the years ahead. As KPO firms try to rapidly scale up, hire from a “down skilled” talent pool, and keep costs low, they need to develop knowledge management systems and processes that can help them document, share and build upon the knowledge that belongs to their employees. Our experience suggests that good KM systems in a KPO firm can make a substantial experience in improving productivity, reducing errors, and reducing training time. I believe that KM is to KPO what six sigma quality is to BPO – a mechanism to achieve dramatic improvements in quality, productivity and cost effectiveness.

Trend 7: Multiple pricing models
With the growth of multiple kinds of KPO work, I believe the industry will move away from “per FTE” pricing to a range of pricing models. At the top end of the spectrum, consulting-type of work (e.g. risk management analytics, equity research) will follow a value-based pricing; the idea is that the KPO helps the client achieve substantial revenue growth or cost reductions, and the KPO is entitled to a share of that value. At the next rung, research/analysis work (involving MBA, CA) will continue to be priced on a “per FTE” or “per hour” basis. The “factory model” work will clearly move to a “per transaction” pricing, for example per company profile for a research firm, or per comparable company for an investment banking study.

Trend 8: “White labeled” services
With India-based KPO firms offshoring a wide range of share of services to professional services firms, there is an attractive opportunity for India-based KPO firms to offer “white label” services. For example, some KPO firms provide end-to-end outsourced services for global market research firms, including research design, survey execution (telephonic or online), data processing, statistical analysis, and PowerPoint presentations. This makes it possible for Indian KPO firms to handle almost 100% of the market research work in the US (except client service and commercials). This could happen in 3 ways: (1) Indian KPO partners with a small US-based market research agency which handles the front-end work, while the Indian KPO does the back-end work; (2) Indian KPO acquires US-based MR agency in order to “carve out” more business for the back-end in India; or (3) Indian KPO offers end-to-end MR services as a full-fledged MR agency, competing with its existing MR clients.